Risks

Participating AMM-style DEX's exposes users to two notable risks: impermanent loss and slippage.

Impermanent loss

Impermanent loss occurs after you have provided liquidity to an AMM pool, and the prices of the assets you have deposited subsequently diverge by a greater amount than when you deposited them. If this occurs, you would have been better off holding the assets separately in your wallet, rather than pooling them in an AMM.

Impermanent loss occurs regardless of the direction the price moves. As long as the price divergence between the pooled assets increases relative to the time of deposit, impermanent loss will occur.

Check out this video by Finematics explaining in detail how impermanent loss works.

Slippage

The AMM constant product function forms a hyperbola when plotting two assets in an AMM pool. This ensures that the AMM pool will always have liquidity, even as prices approach infinity on both sides of the spectrum. However, as the trade size one of one asset approaches infinity, the available reserve of the other will approach zero. This results in the price of the other asset moving against the trader as the trader absorbs liquidity from the pool, resulting in slippage. The larger the trade, the greater the slippage experience by the trader.